Google's big I/O conference announcements largely stuck to the company's core Web services, with one piece of hardware that got no cheers in the hall: a version of Samsung's blockbuster Galaxy S 4 running stock Android.

The culprit, of course, was the price. A room full of spoiled Americans was absolutely shocked to find out that a high-end, unlocked smartphone costs $649, when … that's what a high-end, unlocked smartphone costs.

This is partially Google's fault. Our market is rotten to the core with subsidies; we long ago decided to trade away our consumer freedoms for the illusory benefit of a low up-front price. (Never mind that subsidized phones almost always cost more over two years than they would unsubsidized.) To try to attract subsidy-dazzled Americans, Google rolled out the Nexus 4 last year with a quiet $200-300 subsidy per phone.

But the Nexus 4 is an anomaly; it's a loss leader designed to get stock Android into the market. Amazon's rumored phone may take the same approach, but most phone makers don't have massively profitable secondary businesses that they can use to subsidize their handset prices.

You can get high-end smartphones for less, but without the cutting-edge components that just hit the market in 2013. Unlocked Nokia Lumia 920 Windows phones, for instance, are running about $450 - but they lack the 1080p screens and Snapdragon 600 processors you see on the HTC One and Galaxy S 4.

Where $649 Is CheapMaybe the manufacturers are gouging people in the U.S. and the phones are cheaper around the world, right? No. Italy, Belgium, and the Netherlands all have markets with a single, cross-compatible technology with strict unlocking policies. Hong Kong is also a heavily unlocked market. The 32GB iPhone 5 in HK is $6,388 ($822), in Italy is €839, in the Netherlands is €778, and in Belgium is €799.

You *do* see a lot of people with $250-350 phones in those countries, but they're often phones that aren't sold here at all because the manufacturers don't want to deal with our carrier-controlled market, and they aren't high end. You'd see a flourishing of new midrange device options if the carriers didn't control sales here, but you wouldn't see the prices of the high-end devices go down dramatically.

Why It's $649A smartphone is such a little thing; why is it so expensive?

First of all, we're only talking about the highest-end smartphones with cutting-edge new components. The Galaxy S 4 and its ilk are the equivalent of gaming PCs: they're using all of the newest and most expensive parts. You can get much cheaper smartphones, using parts that have been commoditized with time. Look at T-Mobile's Lumia 521, for instance. With a 1-GHz processor and 800-by-480 screen - specs that would have been excellent just two years ago - it retails for only $130-150 without a contract.

So buyers of the Galaxy S 4, HTC One, and iPhone 5 are paying the traditional premium for the R&D that goes into developing things like all-metal cases and figuring out how to make modems work properly with new Snapdragon 600 processors.

There's also the miniaturization penalty. It's a human tendency to think that larger objects are more valuable. My wife is an artist, and you see this a lot in the art market; some paintings are basically priced by square inch.

But in electronics, often the reverse is true. It's harder to make things small than to make them large: you need more precise manufacturing and you have a higher percentage of failures. Small devices packed with different radios create huge problems in terms of interference and antenna performance. Smartphones might be the most complex consumer product we have today, in terms of difficulty of engineering and manufacturing.

Are the manufacturers taking massive profit margins and keeping prices high that way? Apple makes huge profits on its iPhones, true. But given that Apple and Samsung are making almost all of the profit in the industry, you can't say that the likes of HTC and LG are gouging people.

Are Prices Coming Down?Unlocked high-end smartphones cost $649, just as they did a few years ago. So why aren't prices coming down, as people say they have for PCs? You have to look at the position of cutting-edge components in the market.

Here at PCMag.com we look at a lot of high-end PCs. They often cost $3,000 or more. That's been the case for decades. What's changed over the years is the market for high-end PCs. A few years ago the demand for better and better specs on PCs basically plateaued for most consumers (gamers and professional graphics folk aside, of course.) This is part of what John Dvorak brilliantly called the "Ferrari idling in the driveway" problem: average consumers buying higher-end PCs would find that the applications they were using didn't push the PC's limits. So consumers started focusing on other aspects like price and physical design.

The smartphone world, on the other hand, has a vigorous market for the latest, greatest, high-end components. It's like everybody wants a cutting-edge gaming PC. Phone and component manufacturers have been frantically iterating, feeding this demand for the latest and greatest, and application developers, so far, haven't had problems finding ways to use the new hardware.

We're starting to see a shift there, though. The market for low-to-midrange Android-powered smartphones is booming, and they're quite reasonably priced. At unlocked phone dealer Expansys, for instance, the Samsung Galaxy Y is $119, the Sony Xperia Tipo is $129, and the HTC One V is $225.

The question is when the specs of those kinds of phones will mesh up with what most U.S. consumers want, which I suspect is at least an 800-by-480 screen for Web browsing, and LTE. I think that'll probably come next year at the latest. But if you want the absolute greatest, cutting-edge gadget, you have to be prepared to pay for it.

About the Author

PCMag.com's lead mobile analyst, Sascha Segan, has reviewed hundreds of smartphones, tablets and other gadgets in more than 13 years with PCMag. He's the head of our Fastest Mobile Networks project, hosts our One Cool Thing daily Web show, and writes opinions on tech and society.
Segan is also a multiple award-winning travel writer. Other than ... See Full Bio

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